A maturing derivatives market: Bitcoin margined contracts losing dominance

Arguably, the first significant collateral use case for bitcoin came with the introduction and growth of the derivatives market in crypto. BTC collateralized derivatives have played an important role in BTC's price discovery.

As bitcoin started to gain traction, demand for arenas to hedge and increase exposure arose. Exchange infrastructure inspired by the framework of the traditional finance scene was built, of course, with some disruptive innovations given the crypto sector's experimental nature. Initially, the derivative exchanges in crypto all utilized bitcoin as collateral for trades. Bitcoin was mainly used as collateral out of sheer convenience. Bitcoin became a convenient collateral in the derivative market for several reasons. First of all, the regulatory framework applied to the derivatives market is strict. This made it difficult, if not impossible, for new exchanges to offer derivative products using fiat currencies as collateral for trades. Secondly, the stablecoin market was relatively nascent and small by the time the first major derivative exchanges were built and started to gain traction. Third, bitcoin is a superb collateral for the exchanges. But why?

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Banking on Bitcoin - The State of Bitcoin as Collateral

Bitcoin's unique properties make it the perfect collateral asset. This report covers how bitcoin is used as collateral today through exclusive data. We describe the current market across lending, derivatives, and DeFi, including predictions on future adoption.
Feb 24th 2021